Page 36 - Demo

%u062c%u0645%u064a%u0639 %u0627%u0644%u062d%u0642%u0648%u0642 %u0645%u062d%u0641%u0648%u0638%u0629 %u0640 %u0627%u0625%u0644%u0639%u062a%u062f%u0627%u0621 %u0639%u0649%u0644 %u062d%u0642 %u0627%u0645%u0644%u0624%u0644%u0641 36 %u0628%u0627%u0644%u0646%u0633%u062e %u0623%u0648 %u0627%u0644%u0637%u0628%u0627%u0639%u0629 %u064a%u0639%u0631%u0636 %u0641%u0627%u0639%u0644%u0647 %u0644%u0644%u0645%u0633%u0627%u0626%u0644%u0629 %u0627%u0644%u0642%u0627%u0646%u0648%u0646%u064a%u0629The correlation between security returns within the same country is much less than the correlation between security returns across countries. This is so because of barriers between different markets and the unintegration between them, as well as the various risk factors affecting securities returns (economic, political, institutional, and many other factors ) inside these markets.Domestic vs. International Diversification:Given the differences in the factors affecting securities returns across global markets, it is expected that the correlation coefficients between securities returns in different global markets will be lower than the correlation coefficients between securities within the same local market. This decline is particularly evident if these markets are not in the same region or are affected by factors that differ significantly from the local market.This expected decrease in the correlations between stock returns across international markets and local markets makes international portfolio diversification preferable to local portfolio diversification, even if the portfolio is well diversified. This is because lower correlations between international stock returns reduce the expected risk of an international portfolio compared to a local portfolio.Example 1:An investor wants to decide whether to diversify his portfolio domestically or internationally based on risk and return using the Sharpe ratio. The next table provides the characteristics of the local and international stocks. The risk-free rate is 7%.Correlation with existing businessStandard Deviation (%)Return (%)Local stock 14 18New local stock .90 12 20New international stock .10 15 19Suppose that the investor will invest equally, i.e., 50% each, in the two portfolios, determine the expected return, standard deviation risk and the Sharpe ratio of the resulting local and international portfolios.